Stricter affordability tests were applied to standard mortgages earlier this year, and it has recently been announced that they will be applied to buy-to-let mortgages too. Since lenders understandably like to err on the side of caution, even if you are able to comfortably keep up with repayments you may find it hard to get a mortgage if certain criteria are against you.
To improve your chances of getting past the affordability tests, there are a number of steps that you can take:
Improve Your Credit Score
Lenders put a lot of stock in the information on your credit report, so a good report can make a big difference. You should also make sure to look at a copy of your report for yourself, so that any outright mistakes can be identified and corrected. Your credit report can be obtained online for as little as £2 or if you planning to apply for a mortgage it might be worth getting a subscription service at a small monthly cost to keep an eye on any changes to your credit file. Remember there are a number of quick steps you can take to improve your credit report – such as cancelling old credit cards.
Pay Off Loans
Loans and other debts that you have will be taken into account by mortgage lenders as they assess your ability to afford repayments on a mortgage. If possible, pay off any debts you have before you make your application for a mortgage. This will entirely remove one factor that was counting against you from the equation and put you in a stronger financial position in the eyes of the banks.
The new affordability tests aim to look at you as an individual in order to assess your ability to reliably meet repayments on a mortgage. For this reason, your spending habits are taken into account as well as factors that lenders more commonly look into such as income. This is done in quite a lot of detail, including things like food shopping, bill payments or just about anything they will be able to see from your bank statements. Simply reigning in your spending can increase your chances of success. The earlier you do so the better, because many will go over your past statements, covering a period of up to six months prior to your application, very closely.
This is perhaps the most surprising step you can take. Obviously this doesn’t mean you should keep less of the money you earn – which would contradict the previous step and certainly count against you – but rather that you should avoid certain types of saving. Regular payments into a pension fund or similar saving product are seen by some lenders as a financial commitment. Suspending them for six months while you apply for a mortgage can improve your chances of passing affordability tests, but make sure you check what impact this will have under the terms of the product.
Charles Bean, the deputy governor of the Bank of England, has recently stated that the UK’s record low interest rates would not remain below their record time forever. Well that wasn’t a surprise. However many, myself included, have been hoping that when they do rise, eventually, it will be a very small amount over a quite long period of time. Who wants their mortgage rate to hike, right? But Mr Bean (who is stepping down from the role of deputy governor of the Bank of England’s monetary policy committee) told Sky News that interest rates are most likely to rise to 5% – the level at which they were prior to the financial crisis. According to an online transcript of the interview Mr Bean said that “it might be reasonable to think that in that long term you would go back to 5% but it’s probably quite a long way down the road”.
Officials from the Bank have said that the benchmark interest rate is highly unlikely to rise over 2.5% to 3% in the coming few years due to the several factors which affect growth and inflation. The Bank’s governor Mark Carney set out some of those influencing factors when being interviewed for the Belfast Telegraph. He said that “because of the variety of big forces that are acting on our economy–heavily indebted households, governments that are consolidating debt, a weak export partner in Europe, the strength of the currency, changes to the financial system and all the big forces that are here today and will remain in the immediate term-the appropriate path for interest rates is likely to be limited increases in interest rates at a gradual pace”.
Do others join me in an uneasy sense of distrust?
Both the governor and his deputy are amongst the Bank of England’s officials to have taken to the media in recent weeks to comment on interest rates following the bank’s intervention to prevent British buyers from taking out too many mortgages.
The Bank of England recently instructed lenders not to give more than 15% of new mortgages to buyers looking to finance a home purchase who are looking to borrow more than four and a half times their yearly income.
A new venture by the Illegal Money Lending Team from England will see schools able to provide education to children on the dangers of loan sharks.
A school in West London have already begun testing the lessons. A child in one of these classes defined what a loan shark was: “A loan shark is an illegal money lender who is friendly to you but then after a while they turn nasty and put interest on the money they lent out.”
The head-teacher of Yeading Junior School pointed out the potential benefits this type of education could bring: “When the children go home with the knowledge that they have from the classroom and the skills that they have been using, they will inevitably talk about that and parents will be able to clue into what the children are talking about and in turn make alternative decisions for themselves.”
The nation’s yearly spend on lenders without a license is estimated to be as much as £700 million, with approximately £350 being borrowed each time from loan sharks by 310,000 families.
Cath Williams, a supporter of the new venture from the IMLT believes that “It’s key to teach kids about financial education. What these lesson plans do is look at things like needing something and wanting something and also the difference between debt and credit.”
More than 2000 primary and secondary schools have looked into the lessons. Here’s hoping they really do make a difference to today’s household’s as well as the next generation – though all round financial education basics would be a better move. I think explaining all the costs of living, bills, expenses etc and about income, work, tax etc, as well as the basics of credit cards and loans, should be a compulsory part of secondary school learning. This would give children a sound understanding of the world they will be embarking a journey upon, and hopefully empower them to make better decisions for themselves.
A fabulous future…
The measure of who we are is what we do with what we have.
The Autumn report from the Chancellor George Osborne has been announced following his recent budget arrangements. This included a number of changes (some more positive than others) to small businesses, the state pension and taxes. This is an attempt to lead Britain into “responsible recovery”.
There are a number of ways how this will affect the public. For instance a limit has been set on state benefits, so that the maximum increase will be 1% in April, thus making it lower than living costs. However, this doesn’t include jobseekers allowance and the state pension, as the state pension will increase by 2.7% which is equivalent to £2.95 extra. Pensioners will also have the option to top up any missed National Insurance contributions they may have missed due to gaps in employment, to enable them to have the opportunity of receiving a higher pension. The state pension age is also set to rise between 2044 and 2046 to the age of 68 or even higher, the exact age has yet to be decided by an impartial panel, which had already been predicted would be decided by the future Parliament. This is due to a vast increase in people generally living longer. Although it doesn’t necessarily mean everyone will have to work longer.
Meanwhile for young employed people, they no longer have to begin paying National Insurance contributions until they reach the age of 21 instead of the previous age of 16. This will be a huge expenditure to the treasury of £465 million.
Married couples will benefit from receiving a £1000 personal tax allowance which can be transferred to their spouse if they prefer, providing one person is in the higher tax bracket and the other person is in the lower tax bracket.
Energy bills will not increase as much as has been forecasted due to a “smoke and mirror deal”, as Labour calls it, which has been agreed between the government and energy companies. This will prove to be beneficial to a large proportion of families, who are on a low income and those who have to budget.
Train fares however will continue to rise but is subject to change, although a maximum amount has been set for the more flexible train operators to an increase of 5.1% instead of 6.1%. Despite this regulated rail fares are still set to rise in January but by 3.1% instead of 4.1%. Nothing has been announced as of yet regarding train fares in 2015.
With regards to the housing sector, council tenants who are moving home due to a requirement for their jobs will be prioritised.
A new change will be put in place for overseas residents who have second properties in the UK, they will now be required to pay Capital Gains Tax. The period for calculating Capital Gains Tax for UK residents who are selling their second homes, will be reduced from 3 years to 18 months, providing they have lived in the property at one time.
On a more positive note £1 billion worth of lending will be released to “unblock” large housing development projects.
For small businesses the increase to business rates will not be in line with inflation but will be restricted to 2%, while there will be an extension until April of 2015 to business rate relief. Reduced business rates for small High Street traders will also be part of a 2 year project, which would benefit many businesses.
Overall the chancellor said “difficult decisions” have had to be made despite the economy being in a better position today in comparison to last year.
Reading an article in the Daily Telegraph recently really irked me. It was about how banks have cut the rates they pay as interest to customers meaning that millions of pounds have been knocked off the value of ordinary people’s savings accounts. Actually banks have saved themselves about £850m from the interest accrued by customer savings accounts, just as the major banks are expected to announce billions in profit over the first half of the year.
Savers have seen over 750 cuts so far this year to the interest paid to savings accounts- despite the base rate of interest remaining unchanged by the Bank of England at 0.5%. This is compared to just 86 such cuts being throughout 2012, rate monitoring website Savingschampion found. With estimates putting the amount of savings at around £496bn, this amounts to £850m being lost by savers.
The Daily Telegraph and Savingschampion figures show that the average interest rate on savings accounts has fallen from 1.14% in January to 0.97% now. This equates to savings of £50, 000 receiving £485 annually in interest now- as opposed to £570 in January.
A recent Bank of England report supports the Savingschampion findings. The report showed that the banks had been lowering the interest rates internally and privately, with little or no external scrutiny. It has already been documented that the major banks cut such interest rates following the government’s Funding for Lending Scheme in attempts to gain new customers. The scheme gave banks a year ago access to £80bn of cheap capital from the government. HSBC, for example, calculated that savers with fixed term bonds maturing this year will collectively see a reduction in income of £1bn. This is because the rates on new fixed term bonds are much lower than those on existing bonds.
The Bank of England report found that the value of long term savings products- such as bonds- has fallen to a nine year low, quoting an example that the average interest paid on one year bonds is currently 1.85%, down from 2.06% the previous month; the first time since 2004 that the value has fallen below 2%.
The Savingschampion figures come as banks are entering the reporting season. Barclays reported a half year profit of £3.6bn, with Lloyds Banking Group (including Halifax) reporting profits of £2.1bn. Set against a reported loss of £456m last year, the announcement prompted speculation that the Chancellor might consider selling the taxpayers’ 39% share in Lloyds and return it to private ownership, as Lloyds’ shares climbed in value to 74.1p, a three year high. HSBC and other banks had yet to report.
With the reduced rates saving banks £848m in interest payments to savers, it is likely that the extra money from such activity was put into more profitable bank divisions, such as lending. The revenue generated by these other divisions probably helped to create the half year profits reported earlier this month. Such healthy growth and profits, though, are at the expense of careful savers who have seen the value of their savings fall greatly over the last year. Its the usual story… the rich get richer, and everyone else just has to get by.
Banking practices – far from fabulous.
The Help to Buy scheme is aimed at enabling more people to get onto the property ladder by making buying a home within reach of more people. Launched earlier this year, the first part of the scheme provided equity loans for those who were buying new homes. In a recent statement, the Chancellor of the Exchequer confirmed that the upcoming second stage of the Help to Buy Scheme which menas that from next January, buyers of pre-owned homes will be able to benefit from it, and people will be able to buy homes with a deposit of just 5%. This will work by the government guaranteeing part of any loans or mortgage agreements, giving banks more confidence to lend.
More properties will be covered under the extended Help to Buy scheme- but there will also be more restrictions. Properties worth up to £600,000 will be covered- but second homes and buy to let homes will not be covered. Foreign home buyers with not history of property ownership in the UK will similarly be excluded.
In a series of meetings, the Chancellor will advise the biggest lenders (Lloyds Banking Group, Nationwide, Barclays, RBS and other industry giants) to prepare for the roll out of the extended scheme. He is also expected to tell lenders to check mortgage applications carefully, to ensure that borrowers can actually afford the repayments- and crucially to ensure that there is none of the reckless lending which was a major cause of the global financial meltdown back in 2007 and 2008. Major housebuilding firms will also meet with the Chancellor’s department; many large firms believe that the expected boost to the housing market will have the effect of enabling them to build more houses.
The statements follow the positive impact of Help to Buy. Figures from the British Bankers’ Association show that mortgage approvals has been rising steadily. 37,278 mortgages were approved in June, up from 36,290 in May, and 33% higher than in June last year. Admittedly mortgage approvals occur at an early stage in the house buying process, however figures from HM Revenue & Customs showed that completed house sales have also been rising. May saw 89,050 completed sales, as compared to 75,350 in May 2012.
Despite the overall positive reactions to Help to Buy, the new scheme does have its critics. Some industry analysts warned that the government guarantee could create another housing bubble. I know I, and many of my friends and colleagues, dread house price rises – we in our late twenties and early thirties are the generation that are hit with high house prices. Anyone who bought 10 years ago had lower prices and found it easier to get a mortgage. Its great that there is help for first time buyers, but not if it means even more house price rises.
Other critics, such as the the Building Societies Association and the Council of Mortgage Lenders, have called for greater action from the government. They want the government to outline an exit strategy for the end of Help to Buy in 2016, to give the scheme greater clarity and certainty. Additionally, both groups want greater effort put on long term projects to stimulate home building, to avoid creating demand without supply over time.
Such sentiments are echoed by Lord King, former Bank of England governor, who is against extending Help to Buy. The Institute of Directors (IoD) is similarly critical, with IoD chief economist stating that the long term issues and risks are that “when the scheme is withdrawn any rise in prices that has taken place will be undermined, with potentially disastrous results. There is a real risk that the housing market will become dependent on the underwriting by government, making it very difficult politically to shut the scheme down. This should be of great concern… The world must have gone mad for us to now be discussing endless taxpayer guarantees for mortgages.”
Whatever its failings, or long term economic issues, Help to Buy has undoubtably proved to be a vital stimulus to both house building and house buying initially. What its long term effects will be are uncertain; whether the proposed extension will actually bring about the economic benefits it is supposed to is debatable.
The long running, and still ongoing, PPI mis-selling scandal just does not seem to go away. Despite criticism and reports from the former FSA, despite paying out millions in compensation, financial institutions are still being called to account over this long running scandal.
The latest disclosure was the Financial Conduct Authority’s (the financial services industry regulatory watchdog that took over from the FSA) recent action over Swinton Group Ltd, one the UK’s largest insurance providers.
In a scathing judgement, the FCA found that between April 2010 and April 2012 Swinton, in selling a variety of insurance policies to thousands of customers, had aggressively marketed and sold optional ‘add ons’ to policies (such as personal accident coverage or motor breakdown policies). Customers were not informed at the time that such ‘add ons’ were optional. Indeed, it was found that key terms of insurance policies were not fully explained to customers, and that sales calls were not properly recorded. Such aggressive and profit orientated selling had generated an extra £92 million for the Swinton Group between 2010 and 2012.
As such, the FCA found that Swinton had failed to put the customers’ interests first, instead seeking to boost company sales and profits, and fined the insurer £7.38 million. In addition, Swinton will also be compensating all customers affected, at a cost estimated at £11 million.
In the judgement, the FCA stated that “Swinton adopted a business strategy geared to boosting profit at each stage of the process – design, launch and sale. This strategy meant that it failed to ensure customers’ interests were put at the heart of its business.”
According to a blunt statement from FCA enforcement chief Tracey McDermott “Swinton failed its customers… When selling monthly add-on policies, Swinton did not place the customer at the heart of its business. Instead it prioritised profit… At the FCA we have been clear in our expectation that firms must behave in the interests of consumers.”
The ruling comes after Swinton had written to all 650,000 customers who were affected last year, and paid out £1.9 million in compensation. Swinton (having already been fined £770,000 in 2009 for PPI mis-selling) has been cooperative with the FCA throughout the investigation, and has taken part in an FCA study concerning the best way to write compensation letters. Taking that into account, along with Swinton agreeing to settle at an early stage, the FCA gave the insurance company a 30% reduction.
In response to the ruling, Swinton Group chief executive Christophe Bardet, apologised for these ‘shortcomings’. Apparently, “They were not compatible with the proud history of Swinton.”
FCA chief executive Martin Wheatley has recently launched a review into the insurance sector’s activities over insurance policy ‘add ons’. In addition to insurance companies, polices sold by train companies, airlines and electrical retailers to cover their core services and products will also be examined, over concern that such ‘add on’ policies are little more than extra mechanisms to generate profit, as opposed to protecting the consumer.
A firm ruling against Swinton’s actions- along with the reduction for cooperation- sends a clear signal to the industry regarding Mr. Wheatley’s review that will be “taking a strong interest in the area of add-ons.” Their first study of competition will be examining the impact of current practices on consumers in this very market.
For information on claiming back your mis-sold PPI premiums, visit http://www.oraclelegal.co.uk/ppi-claims
A recent report states that millions of taxpayers should be offered shares in RBS and Lloyds when the government sells its stake in both banks. Privatisation plans are expected to be unveiled by the Treasury in the coming week which has an 81% stake in RBS and a 39% stake in Lloyds.
Policy Exchange the think-tank recommends that the shares should be offered to British residents without having an initial cost and would only need to be paid for upon being sold. The value would be more than a thousand pounds for each person. The think-tank has proposed that citizens aged over 18 who hold a National Insurance number and are registered voters would be eligible to apply for the shares. Such potential share issue could be the biggest of its kind in a generation, and would be since the privatisation of British Gas and BT in the 1980s.
The author of the report Mr Barty says that any action privatising the banks has to be done in such a way as to strengthen them and allow them to operate and compete as any other commercial bank in the industry would. He moved on to say that it is crucial for the transition to be conducted quickly and allow the banks to raise capital from the rise in share prices while also benefiting taxpayers.
The proposed scheme would benefit taxpayers as they would only pay for the shares once their price went above what they were floated at meaning they are risk free and people can earn from the difference. Should the price fall and stay down then the shares would be returned to the government following a 10 year period. The shares could also be automatically managed with the individual setting a percentage rate above the floatation price at which he wishes for his shares to be sold at. The remainder of the government’s stake in the two banks is recommended to be offered to retail investors which are estimated to generate billions for the Treasury.
The plans of George Osborne are as yet unclear however. Although there are hopes for a free giveaway, the reality is unlikely, and if it is, it would only be a percentage of the shares. The chancellor may opt for a straightforward privatisation, then again he may do a mix of both.
Either way, many await to see what the future of these bailed out banks will be, and if we the tax payers who bailed them out will get anything back.
Perhaps the end result will be fabulous? Lets wait and see.